The Fifth Circuit handed down an important decision last week, Louisiana Generating LLC v. Illinois Union Insurance Company, clarifying the scope of coverage under a Premises Pollution Liability Insurance Policy. The policyholder sought coverage for a Clean Air Act suit by the United States alleging unpermitted major modifications that resulted in increased emissions of sulfur dioxide and nitrogen oxide. The insurer disputed coverage on the ground that the government under the Clean Air Act was seeking not remediation costs or compensatory damages but an injunction to repair emission control equipment to comply with regulatory standards. According to the insurer, injunctions were excluded from coverage under the Fines and Penalties exclusion to the policy.

Applying New York law, consistent with the insurance policy’s choice of law provision, the Fifth Circuit affirmed the District Court’s summary judgment decision requiring the insurer to provide a duty to defend. The Fifth Circuit noted that the complaint by the United States was not limited to an injunction requiring repairs to the emissions control equipment but also sought remedial costs to address the release into the atmosphere of unpermitted levels of certain pollutants.

While the possibility of remediation costs was sufficient to trigger the insurer’s duty to defend, the Fifth Circuit went on in perhaps its most significant holding to reject the insurer’s argument (which had been adopted by the lower court) that the policy excluded all injunctive relief in its Fines and Penalties exclusion which precluded coverage for “Payment of criminal fines, criminal penalties, punitive, exemplary or injunctive relief.” The Fifth Circuit construed that exclusion narrowly limiting it only to injunctions that were part of a criminal or punitive fine or penalty. As the Fifth Circuit explained, many environmental laws, like the Clean Air Act, are structured to obtain compliance through either voluntary remediation work or court ordered injunctions, and it would make little sense if a Premises Pollution Liability Insurance Policy provided coverage for voluntary remediation work but did not cover the same work when done under a court order:

If the Fines and Penalties exclusion is a complete bar for coverage of costs associated with injunctive relief, the exception would potentially swallow the coverage afforded by the policy. The policy would not cover claims under major federal environmental statues, such as the CAA and the Clean Water Act, when they are enforced by the EPA or state agencies seeking injunctive relief to mitigate and remediate past pollution.